Israel’s house price boom continues

July 15, 2016

The average price of owner-occupied dwellings in Israel rose by 4.01% during the year to Q1 2016, to ILS1,423,000 (US$369,107), from annual price rises of 6% in Q4 2015, 5.2% to Q3, and 7.3% to Q2, and 7.6% to Q1, according to the Central Bureau of Statistics (CBS). When adjusted for inflation, house prices rose by 4.52% y-o-y in Q1 2016. On a quarterly basis, nationwide house prices rose by 0.4% (1.37% in real terms) during the latest quarter.

Gush Dan saw the highest house price increase during the year to Q1 2016, with prices rising by 11.7%. It was followed by the Northern district (9.5%), Qrayot Haifa (6.3%), Southern district (6.2%), and Haifa (5.9%).

The country’s most expensive is in Tel Aviv, where the average price of owner-occupied dwellings was ILS2,573,100 (US$667,428) in Q1 2016. It was followed by Jerusalem at ILS1,822,300 (US$472,680) and Sharon at ILS1,799,800 (US$466,844). Qrayot Haifa had the cheapest housing in Israel, with an average price of ILS959,200 (US$248,804).

Israel has experienced dramatic house prices rises in the past eight years (with the exception of 2011), despite domestic political uncertainty, security threats, and the global financial meltdown. In fact, house prices have risen by 102% (69% inflation-adjusted) from 2006 to 2015.

The average price of owner-occupied dwellings rose by 4.1% (-0.47% inflation-adjusted) in 2008

Property prices rose by 22.35% (18.15% inflation-adjusted) in 2009

Property prices rose by 17.04% (14.16% inflation-adjusted) in 2010

Property prices rose by just 0.04% in 2011, but when adjusted for inflation, prices actually dropped 2.39%

Property prices rose by 5.82% (4.12% inflation-adjusted) in 2012

The average price of owner-occupied dwellings rose by 7.38% (5.38% inflation-adjusted) in 2013

Property prices rose by 7.21% (7.41% inflation-adjusted) in 2014

Property prices rose by 5.99% (6.88% inflation-adjusted) in 2015

The main reason for the continued rise in house prices is the supply shortage, due to low construction volumes. Other factors contributing to the house price boom have included the central bank’s expansionary monetary policies, and the lack of alternative investment options.

"Real estate accounts for 19% of gross domestic product directly and another 13% indirectly,” says Elli Kraizberg, a professor at Bar-Ilan University. “Real estate accounts for not less than 40% of the public’s total wealth.”

Nationwide house prices are expected to continue rising in coming months, amidst strong demand, coupled with the housing supply shortage.

The economy is expected to expand by 2.8% this year, after growing by 2.6% for both 2014 and 2015, 3.3% in 2013, 2.9% in 2012, and 5% in 2011, according to the Bank of Israel. The Bank of Israel kept its benchmark interest rate at a record low of 0.1 in May 2016, in an effort to boost economic growth while maintaining price and financial stability.

Recent history: house price rises cause social protests

The global house-price crisis missed Israel. From Q1 2010 to Q2 2011 average house prices in Israel rose almost 13%. One result was a social protest movement, which began in July 2011 with a Facebook group protesting Israel’s rising cost of living (specifically housing costs) as well the worsening condition of public services.

The central bank then raised the benchmark rate four times to 1.5% in April 2010, as the Israeli economy recovered from the global crisis. Then in August 2010 the key rate was again raised to 1.75%, in a move to cool Israeli house prices and prevent a housing bubble. CBI rate hikes continued until the key rate reached 3.25% in June 2011.

House price rises then slowed during the second half of 2011. House price growth was only 0.5% between Q3 2011 and Q1 2012. The districts of Tel Aviv (-3.1%), Sharon (-2.9%), Gush Dan (2.3%), and Jerusalem (-1.2%) actually experienced house price declines.

In Q2 2012 house prices started to rise again and have been moving upward ever since. House prices rose by 25.7% from Q2 2012 to Q4 2015, with the North (38.1%) and Qrayot Haifa (32.4%) leading the price surge.

History: Israeli house prices and conflict

Israeli house prices seem to be somewhat affected by periods of conflict with Israel’s neighbours, though many would deny any correlation. House prices rose 28% (25.8% in real terms) between Q2-2003 and Q1-2006, due to the economic stability brought by the success of the electronics industry, investments and financial aid from the US, by inward investment, and by the improved security situation.

The war between Israel and Hezbollah, which erupted in July 2006, however rocked an already volatile political environment. Consumer and investor confidence dropped. Both supply and demand for housing fell.

The average price of houses fell 11.6% from the peak level of ILS 793,800 (US$205,488) in Q1 2006 to ILS 701,700 (US$181,646) in Q4 2006. Although the war formally ended in August 2006, the lingering uncertainty over the peace and order situation led to weakness in the housing market.

During 2007, the housing market recovered slightly with 4.9% y-o-y price increase (2.1% in real terms). However, the recovery was interrupted by the rising tensions with Iran and with the Hamas-controlled Gaza Strip. Israel’s continued expansion of Jewish settlements in East Jerusalem and in the West Bank also increased tension.

Tel Aviv’s housing market suffers the most whenever the country is in conflict. With the Israel-Hezbollah war, house prices fell 12.6% from Q1 to Q4 2006. In contrast, the Southern district, relatively unscathed by the conflict, registered an 8.9% price increase over the same period.

Property prices in other districts have partially recovered since the cessation of conflict at the end of 2006. Surprisingly, Tel Aviv recorded the highest house price rise of 22.37% y-o-y in 2007. The national average price also rose by 4.9% over the same period.

During the global crisis Israel enjoyed double-digit house price rises. The highest house price increase was recorded in Tel Aviv, at 41% between Q1 2008 to Q4 2009. Only the Northern district registered a single-digit house price growth of 4.7%. The average price in Israel rose 24.2% between Q1 2008 to Q4 2009.

The housing market was again affected by the 2011 Israeli social justice protests, with nationwide house prices rising by a meagre 0.53% from Q3 2011 to Q1 2012. Over the same period, house prices fell in Tel Aviv (-3.06%), Sharon (-2.93%), Gush Dan (-2.26%), and Jerusalem (-1.22%).

Israel’s housing market has been unscathed by the Syrian civil war. House prices in the country rose 25.4% from Q2 2012 to Q4 2015, with all districts registering double-digit increases over the period.

Property sales at record high

In 2015, sales of new dwellings surged 40.2% y-o-y, to a record high of 31,575 units, according to the CBS. Dwelling sales had averaged 20,300 units from 2000 to 2014.

During the first four months of 2016, new dwellings sold rose 2.5% to 10,819 units as compared to the same period last year.

Southern district saw the biggest annual increase (of almost 70%) to 1,735 units

In Haifa, new dwellings sold rose by 7.7% to 1,674 units

In the Center, new dwellings sold rose by 4.2% to 3,738 units

In Jerusalem, new dwellings sold fell by 12.1% to 881 units

In Tel Aviv, new dwellings sold fell 12.4% to 1,766 units

In the Northern district, new dwellings sold fell by 23.6% to 741 units

In Judea and Samaria Area, new dwellings sold fell 27.8% to 288 units

In April 2016, the total number of new dwellings for sale in Israel rose by 2.7% y-o-y to 26,917 units, according to the CBS.

Housing supply remains low

Dwelling completions dropped 15.4% to 9,643 units in Q1 2016 from the same period last year, according to the CBS. More than 30% of all completions were in the Central district, followed by the Northern and Southern districts, with 19.6% and 12.4% shares, respectively.

Completions fell by 2.8% y-o-y to 43,399 units in 2015, though it was far higher than the annual average of 33,600 units from 2001 to 2011.

Likewise, dwelling starts fell by 8.1% to 11,812 units in Q1 2016 from a year earlier, according to the CBS. Central accounted for about 32% of all dwelling starts in Q1 2016, followed by the Northern district (16.5%), Southern district (15%), and Tel Aviv (13.5%).

Dwelling starts have increased in recent years, averaging 46,300 units annually from 2011 to 2015, up from an annual average of 33,000 units from 2001 to 2010.

Mortgage interest rates rising, despite record low key rate

Mortgage interest rates in Israel are now rising gradually. In May 2016, the average mortgage interest rate in Israel was 2.93%, up from 1.96% in May 2015 and 2.23% two years ago.

By loan term:

Up to 5 years: 2.73% in May 2016, up from 1.75% a year earlier

From 5 to 10 years: 2.73%, up from 1.77% a year earlier

From 10 to 15 years: 3%, up from 2% a year ago

From 15 to 20 years: 3.26%, up from 2.26% a year ago

From 20 to 25 years: 3.48%, up from 2.45% a year ago

More than 25 years: 3.5%, up from 2.57% a year earlier

The central bank cut the key rate by a total of 375 basis points from October 2008 to April 2009, till it hit a record low of 0.5% in April 2009. But Israel was in fact less affected by the crisis than expected and by June 2011 key rates were back up to 3.25%.

In October 2011 the rate hikes stopped, and instead, the BOI lowered the key interest rate to 3.03%. It was the beginning of continuous rate cuts over succeeding years. In March 2015, the BOI cut the key rate to a record low of 0.1%, down from the previous rate of 0.25%, to return the inflation rate within the 1-3% target, as well as to support growth.

Is the increase in housing loans a threat to financial stability?

From 2007 to 2015, housing loans has continuously increased by an average of 8% per year. In April 2016, total housing loans outstanding rose 6.7% y-o-y to ILS323.72 billion (US$83.97 billion), according to the Bank of Israel.

Housing credit now accounts for 48% of banks’ credit portfolios, up from 32% in 2007.

Despite this, the mortgage market has expanded less than expected and was only around 27.8% of GDP in 2015, almost the same ten years ago. This is a modest level of borrowing in a developed country. Though housing debt constituted around 68% of total household debt in April 2016, households in Israel still have a large surplus of assets over liabilities. In fact, the ratio of household debt to GDP has increased only mildly in recent years and is low by international standards.

In the BOI’s Financial Stability Report released in December 2015, the central bank noted the following:

“The average level of risk in new housing loans declined somewhat. The average loan to value (LTV) ratio was 52.8 percent in September 2015, basically unchanged from year-earlier, but the average payment to income (PTI) ratio fell by 1.5 percentage point, to 25 percent. Furthermore, only around 3 percent of new housing loans in recent months are considered high-risk.”

This means that the mortgage market remains healthy, despite the continued rise in housing credit.

Poor yields; falling rents

Gross rental yields on apartments in Tel Aviv are very low, supporting the view that properties are somewhat overpriced. Yields ranged from 2.06% to 3.03%, based on the Global Property Guide research in August 2015, with smaller apartments having higher yields.

Nationwide rents dropped slightly by 0.7% in Q1 2016 from a year earlier, to an average of ILS3,715 (US$964) per month, according to the CBS.

By district:

Tel Aviv has the most expensive rents in the country at an average of ILS5,531 (US$1,435) per month in Q1 2016, down 2.5% from a year ago

In Jerusalem, the average rent dropped 0.8% y-o-y to ILS4,084 (US$1,059) per month in Q1 2016

In Haifa, the average rent rose 2.2% y-o-y to ILS2,548 (US$661) per month in Q1 2016

In Gush Dan, the average rent increased 1.4% y-o-y to ILS3,804 (US$987) per month in Q1 2016

In the Center and Jerusalem Periphery Towns, the average rent increased 1.9% y-o-y to ILS3,613 (US$937) per month over the same period

In the Southern district, the average rent rose 3.4% to ILS2,655 (US$689) in Q1 2016 from a year earlier

In Sharon, the average rent fell by 2.3% y-o-y to ILS4,399 (US$1,141) in Q1 2016

In the Northern district, the average rent rose by 4.2% y-o-y to ILS2,513 (US$652)

In Qrayot Haifa, the average rent rose by 4.5% y-o-y to ILS2,380 (US$617) in Q1 2016

Over the past two decades the country´s homeownership rate has been gradually declining, and more households are renting, due to the shortage of affordable housing. In 2014, the homeownership rate stood at 67.3%, down from 68.8% in 2008 and 73% in 1995.

Modest economic growth; very low unemployment

The economy expanded by 2.6% in 2015, after annual growth rates of 2.6% in 2014, 3.3% in 2013, 2.9% in 2012, and 5% in 2011, according to the IMF.

Then in the first quarter of 2016, Israel’s economy grew at an annualized rate of 1.3%, as slowing global trade weighed on exports, according to the CBS.

In Q1 2016:

Exports fell by 1.1%

Government spending dropped 1.6%

Private spending grew 4.8%

Investments in fixed assets rose by 16.2%

The economy is forecast to expand by around 2.8% this year, according to the Bank of Israel.

Israel’s unemployment rate fell to 4.8% in May 2o16, its lowest level since 1983, according to the CBS. Some economists believe this to be the “natural rate of unemployment.” The country’s unemployment rate has been generally declining since 2003.

“The jobless rate is not only low historically but low by international standards, and by conventional economic definitions there’s no unemployment at all in Israel,” said Moti Bassok of Haaretz.

Wages have been rising at a 5% annual rate since the beginning of 2016. Currently, the average monthly wage in Israel stand at ILS10,128 (US$2,645).

Inflation was -0.8% in May 2016, from -0.9% in April, -0.7% in March, and -0.2% in February, according to the CBS. Inflation stood at 0.6% in 2015, up from 0.5% in 2014, but down from 1.5% in 2013, 1.7% in 2012, and 3.5% in 2011, based on figures from the IMF.

In 2015, the country recorded a budget deficit of ILS24.5 billion (US$6.25 billion), representing just 2.15% of GDP – the smallest deficit since 2007, according to the Finance Ministry. The budget shortfall is expected to fall further to ILS14.1 billion (US$3.7 billion) next year.

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